2013 budget summary


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A brief summary of budget proposals by Minister of Finance.

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2013 budget summary

  2. 2. Table of ContentsFew Thoughts .................................................................................... 3Part I ................................................................................................. 4 Direct Tax ......................................................................................... 4Part II ............................................................................................. 13 Indirect Tax ..................................................................................... 13 Customs ....................................................................................... 13 Excise .......................................................................................... 19 Service Tax .................................................................................. 211
  3. 3. Few Thought Unarguably, world economy has suffered a setback after 2007. Someemerging economies did reflect growth after 2007, but the rate of growth isslow and it appears to be fading like the Cheshire Cat smile. Slow growth isresultant of crumbling of financial institutions like an apple pie. Even though failure offinancial institution has occurred in advanced economies, the tremors of crumble areexperienced in developing economies as well. To revive economies it is imperative tostrengthen the structure that provide finance to corporations. Strengthening solelydomestic financing structure would not suffice. It is necessary that along withdomestic financing structure, cross border investment and financing modalitiesshould be revived and replenished with trust. This year, Minister of Finance leaves us with mixed feelings. Enhancement ofrate of surcharge, increase in rate of tax of royalties and fee for technical services,continuation of Dividend Distribution Tax and levy of new tax on buy back of shareswould result in returns to foreign investors on Foreign Direct Investments in Indiaslighter. Tax relief on Infrastructure Bonds, Securitization Trust, a pass through statusto Alternative Investment Fund, relief to investor of Mutual Funds and InfrastructureBonds (NBFC or Mutual Funds both) reflects commitment and desire to have a strongbond market that would enhance availability of finance to corporations. Controversial GAAR provisions are put on hold and shall not see the light of the dayuntil April Fool’s Day in 2016. A clarification on tax residency certificate has left manydisgruntled. Be that as it may, the restrain on returns on foreign direct investmentshould be reconsidered.2
  4. 4. This note provides a brief of the proposed changes to the Income Tax Act1961 that shall impact on corporate (domestic and foreign) that havebusiness in India. Part I summarizes Direct Tax and Part II containsIndirect Tax. PART – IDirect TaxRate of TaxThe following rates are proposed in respect of business income of theDomestic and the Foreign Companies: Slabs Income Tax (USD) Domestic Foreign 0 – 200,000 30.90 (30+3) 41.2 (40+3) 200,000 – 2,000,000 32.45(30+5+3) 42.02( 40+2+3) 2,000,000 – and above 33.9( 30+10+3) 43.26(40+5+3)The Dividend Distribution Tax (DDT) is levied at the rate of16.9959(15+10+3)The Royalties and Fee for Technical Services shall be taxed at the rate of28.3 (25+10+3)3
  5. 5. Tax on transaction in relation to Commodities DerivativesIt is proposed that a new tax on the sale of commodities derivatives islevied at the prescribed rates.This tax shall be levied from the tax year 2013-14This tax is a deductible expense in accordance with the provisions ofSection 36 of the Income Tax Act;This deduction shall apply from the tax year 2013-14.Tax on Income by way of Royalty or Fees for Technical ServicesPresently, the domestic tax prescribes that the royalties and fee fortechnical services shall be taxed at a rate of 10%. Whereas the Doubletaxation Avoidance Agreement (DTAA) with several countries prescribethat the royalties and fee for technical services shall be taxed at a ratewhich may vary between 10%-25%. As the domestic tax prescribes for alower rate of taxation, a non resident tax payer that could take benefit ofthe treaty is taxed at the rate of 10%.It is proposed that the benefit as provided by the present domestic taxshall be withdrawn and the royalties and fee from technical service shallbe taxed at the rate of 25%. Please note that the relief provided in termsof the double taxation avoidance agreement shall be available to the taxpayer.Incentive for acquisition and installation of new plant ormachinery by manufacturing companyAn investment linked deduction equal to 15% of the aggregate amount ofactual cost of new assets acquired and installed shall be provided to thetax payer if such investment is more than USD 20,000,000.To claim the deduction, tax payer shall be restricted from transferring thenew assets for a period of 5 years provided that such transfer is notoccasion by merger or a demerger of two companies.4
  6. 6. This amendment shall take effect from the tax year 2014-15.Extension of incentives to power sectorThe deduction provided in terms of the existing provisions of the domestictax to power generation, distribution and transmission companies were tolapse with the year ending 31, March 2013. These deductions could beavailed by the companies engaged in power generation, distribution andtransmission for another year i.e until 31, March 2014.Exemption from tax to Investor Protection Fund of depositoriesThe Income by way of contributions from a recognized stock exchangereceived by a Investor Protection Fund set up by a recognized stockexchange is exempt from taxation.The income by way of contribution from a depository of the InvestorProtection Fund shall not be included in total income.The exemptions shall be applicable for tax year 2014-15.Tax on Dividends received from foreign companiesDividends received from foreign company (in which Indian Company holdsmore than 26% share) by an Indian Company shall be taxed at the rate of15% if such dividend is included in total income.This lower rate of taxation shall apply for the tax year 2014-15.Dividend Distribution Tax (DDT)It is proposed that in the event a foreign subsidiary of an Indian HoldingCompany declares dividend to the Indian Holding company and the IndianHolding Company declares a dividend in the same financial year, than thedividend declared by the Foreign Subsidiary to an Indian HoldingCompany shall not be subjected to DDT.This provision shall become effective from June 1, 2013.5
  7. 7. Tax on Infrastructure bondsThe beneficial rate of tax at the rate of 5% on interest payments by anIndian Company to a Non Resident if such Indian Company raises loans orissues long terms Infrastructure Bonds to borrow money in foreigncurrency is now proposed to be extended to such cases where the non-resident operates a designated bank account and coverts foreign currencyinto Indian Rupees to subscribe to such Infrastructure Bonds or lend.This amendment shall take effect from June 1, 2013Taxation of Securitization TrustsA special regime of taxation is proposed for income of trust engaged inSecuritization. It is proposed that: (i) Income of Securitization Trust set up and regulated by SEBI or RBI shall be exempt from tax; (ii) Income of Securitization Trust distributed to its investors shall be subject to Distribution tax, if income of such investor is chargeable to tax and no tax shall be payable if income of such Investor is not chargeable to tax; (iii) The Income of Securitization Trust so distributed shall not be subject to tax in the hands of the Investors;These amendments shall take effect from June 1, 2013.Tax on Alternative Investment FundsAn amendment is proposed to the provisions related to tax on income ofVenture Capital Company (VCC) and Venture Capital Fund (VCF) frominvestment in Venture Capital Undertaking (VCU) in light of the recentrepeal of SEBI (Venture Capital fund) Regulations 1996 and replacementwith SEBI (Alternative Investment Fund) Regulations 2012. In terms ofSection 10 (23FB) read with 115U, a pass through status is provide to VCFand VCC as their income is taxable in the hands of their investors.It is proposed to amend Section 10 (23FB) and continue the pass throughstatus in such a manner that:6
  8. 8. (i) The VCF and VCC registered prior to repeal of SEBI (Venture Capital fund) Regulations 1996 shall avail a pass through status;(ii) The VCC and VCF established in terms of SEBI (Alternative Investment Fund) Regulations 2012 shall avail pass through status provided certain specified conditions are fulfilled.Capital Gains on Immovable propertiesIt is proposed to inset a new Section 194 – IA to oblige every buyer todeduct tax at source at the rate of 1% from the consideration payable tothe seller of an immovable property. Provided value of such property isnot less than 50 lakhs.Tax on buy-back of unlisted sharesIt is proposed to introduce an additional income tax on buy back of sharesat the rate of 20%. The tax is charged on distributed income. Thedistributed income shall be the difference of the amount received by theCompany at the time of issue of such shares and the consideration paidfor buy back of shares.The income arising to the shareholder in respect of such buy back by thecompany would be exempt where the company is liable to pay theadditional income tax on the buy-back of shares.The amendments shall take effect from June 1, 2013.Computation of Immovable PropertyThe present domestic tax law provides that the value of immovableproperty (in case such immovable property is a capital asset) to beconsidered for determination of tax shall be the value that the relevantstate government determines for the purposes of imposing stamp duty atthe time of registration of the transfer of the said immovable property. Itproposed that a similar provision may be adopted in case the immovableproperty is a stock in trade for the tax payer and income from transfer istreated as income under the head ‘profit and gains of business andprofession’.7
  9. 9. It is also proposed that the consideration of the immovable property to beconsidered for the purposes of tax shall be the value determined betweenthe parties on the date execute an Agreement to Sell or the valuedetermined by the relevant state government on the date of Agreement toSell. The consideration of the immovable property on the date ofregistration of transfer shall not be taken into consideration.The amendment shall take effect from April 1, 2014.Amendment & Extension of GAARIt is proposed that the General Anti Avoidance Rule (GAAR) provisionsmay be amended to give effect to the recommendation of the ExpertCommittee appointed by the Government of India (GOI) to review theseprovisions. It is proposed to consider the following: (i) The provisions related to GAAR shall come into effect from the tax year 2016 – 17; (ii) An arrangement to obtain tax benefit would be an impermissible avoidance agreement; (iii) To determine whether an arrangement is an impermissible arrangement factors such as period, or time for which such arrangement has existed, payment of tax by assessee and the fact that an exit route was provided by the arrangement, would be relevant; (iv) An arrangement shall deem to lack commercial substance if it does not have an effect on a business risk or net cash flow of any party to the arrangement. (v) Direction of approval panel shall be binding upon the tax payer and the Income Tax Authorities; (vi) Definition of ‘associated parties’ and ‘connected parties’ as stated in the provisions of GAAR shall be merged.These amendments shall take effect from April 1, 2016.Tax on income distributed by the Mutual FundsIt is proposed that the rate of taxation in respect of income distributed bythe Mutual Funds to its unit holders is different for individual, HUF and8
  10. 10. any other person. It is proposed that this income shall be taxed at uniformrate of 25% in all cases.Interest paid to a non resident investor by an Infrastructure Debt Fund -NBFC or Infrastructure Debt Fund – Mutual Fund is taxed at differentrates. It is proposed that in both cases, the interest income to a non-resident shall be taxed at 5%.The amendments shall take effect from June 1, 2013.Amendment in the definition of Capital AssetThe agricultural land is not considered to be a capital asset of a tax payer.It is proposed to revise the definition of agricultural land.This amendment shall take effect from April 1, 2014.Scope of Keyman insurance policyThe existing domestic tax exempts income received under a life insurancepolicy provided that such life insurance policy is not a keyman insurancepolicy. It is proposed that a keyman insurance policy shall remain akeyman insurance policy even if the policy during its term is assigned toemployee for whom such policy was taken. In other words, a keymaninsurance policy shall be considered as a keyman insurance policy even incase it is assigned to the employee and any income received from suchinsurance policy shall be subject to tax.The amendment shall come into effect from April 1, 2014.Political ContributionsIt is proposed to amend the provisions in such a manner that any cashcontribution to a political party or an electoral trust shall not be allowed asdeduction under the provisions of the domestic tax laws;This amendment shall come into effect from April 1, 2014.9
  11. 11. Clarification of the phrase “tax due” for the purposes of recoveryin certain casesIt is proposed that the term ‘tax due’ shall include penalty, interest andother sum payable.Therefore, directors of such private company those fail to pay tax ondemand shall be liable to pay tax unless the directors could establish thatthe private company has not failed to pay tax due to his negligence,breach of duty or malfeasance.Incentives for blue collar wagesA tax incentive is extended to a manufacturing unit in case it employs bluecollared workers. It is proposed that this tax incentive shall not beavailable in the event factory is hived off or transferred from anotherexisting entity or acquired as a result of amalgamation or merger.The amendment shall take effect from April 1, 2014Tax Residency CertificateThe domestic tax makes a provision for production of a tax residencycertificate which provides for the prerequisite information to avail benefitsof a double tax avoidance agreement. It is proposed to clarify that thesubmission of a tax residency certificate is a necessary but not a sufficientconditions for claiming benefits under the Double taxation avoidanceagreement.10
  12. 12. Part IIINDIRECT TAXThis part discusses proposed changes to the prevailing Indirect Taxationregime which consists of duties of customs, duties of excise and servicetax. Changes to Indirect Tax are applicable immediately unless statedotherwise.CUSTOMSAmendment to the Customs ActThe following amendments are proposed to the Customs Act, 1962(Customs Act)(i) Section 11 of the Customs Act empowers the GOI to prohibit either absolutely or conditionally the import and export of any goods for the prescribed purpose. An amendment is proposed to add words “designs and geographical indications” after words ‘the protection of patents, trademarks and copyrights”.(ii) Section 28BA of the Customs Act provides for provisional attachment of property with prior approval of the Commissioner of Customs to protect the interest of revenue. It is proposed that the Custom Officers shall have power to provisionally attach the property of the tax payer in case a notice has been served as the duty of custom was levied, short or has not been levied because of collusion or, any willful mis-statement; or suppression of facts;(iii) Section 28E of the Customs Act provides that an Indian wholly owned subsidiary of a foreign holding company may apply for advance ruling in the case it proposed to undertake any business activity in India. It is proposed that to expand the scope of this section, the term ‘activity’ shall include any new business of import or export proposed to be undertaken by the existing importer or exporter;(iv) Section 29 of the Customs Act restrains a person in charge of an aircraft or vessel to call or land at a customs port or customs11
  13. 13. airport. It is proposed that the Central Board of Central Excise and Customs be empower to permit a vessel and aircraft to land at a place other than customs port or customs airports.(v) Section 47 of the Customs Act empower a customs officer to clear goods for home consumption on payment of duty. In case duty is not paid, then it could be paid within five days from the date on which bill of entry are returned. Thereafter the duty shall be paid with interest. It is proposed that the number of five days now be reduced to two days.(vi) It is proposed to amend Section 49 of the Customs Act to restrict the period of storage of imported goods clearance of which is pending. Such goods cannot be stored for more than thirty days at a time in either public or private warehouse. The Commissioner of Customs is empowered to extend the days but not more than 30 days at a time.(vii) Section 69 of the Customs Act provides that any goods could be exported, if warehoused, without payment of import duty provided certain conditions are met.(viii) In terms of the Customs Act, offences are classified as bailable (where criminal court is empowered to grant bail mandatorily). It is proposed that following offences under the Customs Act may be construed as non-bailable (where criminal court has to exercise discretion to grant bail): (a) evasion or attempted evasion of duty exceeding INR 50,00,000; (ii) prohibited goods notified under Section 11; (b) import and export of goods which are not declared and their market price exceed USD 200,000; (iv) fraudulently availing any exemption from duty that exceeds USD 100,000; Further it is clarified that all other offences than the offences stated above are bailable.12
  14. 14. Amendment to the Baggage RulesThe following amendments are proposed to the Baggage Rules:(i) To raise the duty free allowance in respect to jewellery for an Indian passenger who was residing abroad for over a period of one year or a person who is transferring his residence to India from INR 10,000 to 50,000 in case of man and in case of woman from INR 20,000 to INR 1,00,000.(ii) The duty free allowance for a crew member is increased from INR 600 to INR 1,500.Rate of Custom DutiesThe following revisions to the duties of customs are proposed: Sr. Goods Prevailing Proposed No. 1 Dehulled oat grain 30% 15% 2 Hazel nuts 30% 10%. 3 De-Oiled rice bran 10% Nil oil cake 4 New passenger cars and other motor vehicles (high end cars) with cif value more than us$ 40,000 and/or engine capacity exceeding 3000cc for petrol run vehicles and13
  15. 15. exceeding 2500 cc for diesel run vehicles 75% 100%. 5 Motor cycle with 60% 75% engine capacity of 800cc or more 6 Limonite Nil 10% unprocessed 7 Limonite, Nil 5% upgraded 8 Bauxite Nil 10% 9 Stainless steel 10% 5% wire cloth stripe for use in the manufacture of catalytic convertors and their parts 10 Stainless steel 7.5% 5% wire wash coat for use in the manufacture of catalytic convertors and their parts 11 Pre-Forms of 10% 2% precious and semi- precious stones. 12 Steam coal (basic) 0 2% 13 Steam coal (cvd) 1% 2%14
  16. 16. 14 Bituminous coal 5% 2% (basic) 15 Bituminous coal 6% 2% (cvd) 16 20 specified 7.5% 5% machinery for use in leather and footwear industry. 17 Yachts and motor 10% 25% boats 18 Electric and hybrid vehicles basic Nil Nil cvd 6 6 sad Nil Nil 19 Raw silk (not 5% 15% thrown) 20 Textile machinery 7.5% 5% & parts 21 Set top boxes for 5% 10% tv15
  17. 17. Other Proposals(i) It is proposed to extend the time of consumption of imported goods by the ship repair units from a period of 3 months to 1 year. Similarly extensions of time are provided to aircrafts as well.(ii) The exemption granted in respect of education cess and secondary & higher education cess on aircraft and aircraft parts, soybean oil, olive oil etc. is withdrawn16
  18. 18. EXCISEAmendment to the Excise ActThe following amendments are proposed to the Central Excise Act, 1944(Excise Act)(i) At present Section 9 of the Excise Act provides that an evasion of duty beyond thirty lakhs attracts imprisonment of seven years with fine. It is proposed to relax this provision by enhancing the limits of duty evasion from USD 50,000 to USD 100,000.(ii) It is proposed that the Section 9A of the Excise Act be amended to carve out certain offences such as evasion of excise duty, dealing with goods which under the act are liable for confiscation and categorized them as cognizable and non-bailable (grant of bail in such matter is a discretion of appropriate court where such matters are tried). (iii) It is proposed to amend Section 11 of the Excise Act in such manner that the recovery of duty could be initiated from the agent of the tax payer; (iv) It is proposed to amend Section 11 A of the Excise Act to equate service of statement containing details of duty not paid, short levied or erroneously refunded is a deemed service of notice as prescribed under the Excise Act.Rate of Custom DutiesThe following revisions to the duties of customs are proposed: Sr. Goods Prevailing Proposed No. 1. Tapioca sago 15% Nil (sabudana) and tapioca starch17
  19. 19. 2. Henna powder or paste 15% Nil 3. Sports utility vehicles 27% 30% 4. Truck chassis 14% 13% 5. Silver Nil 4% manufactured from zinc/lead smelting 6. Stainless steel "Patta Patti" per machine per month Rs 30,000 Rs 40,000 7. Ships and other Exempt vessels 8. On hand made carpets and carpets Exempt 9. Textile floor coverings of coir Or jute, whether Exempt or not handmade 10. Mobile phones of 1% 6% retail sale price exceeding Rs 200018
  20. 20. Other ProposalsThe following is proposed in addition to the above:(i) It is proposed to clarify that the trimmed or untrimmed sheets or circles of copper intended for use in manufacture of handicrafts or utensils shall include copper and copper alloys;(ii) It is proposed that the ‘Zero Excise Duty Route’ in relation to brnaded readymade garments and made ups is restored.(iii) It is proposed that branded ayurvedic medicaments and medicaments of Unani, Siddha, Homeopathic or bio-chemic system are being brought under MRP based assessment with abatement of 35% on MRP.SERVICE TAXAmendment to the Service TaxThe following amendments are proposed to the Finance Act, 1994 (Service Tax Act)(i) The scope of Section 65 B (11) of the Service Tax Act is enhanced by including State Council of Vocational Training.(ii) It is proposed that the term designated trades shall include courses offered by Industrial Training Institute or Industrial Training Centre affiliated to State Council of Vocational Training. The services rendered by these Industrial Training Institute and Industrial Training Centre shall be part of negative list.(iii) Section 65B (40) of the Service Tax Act shall be amended to include processes carried out in terms of Medicinal and Toilet Preparations (Excise Duties) Act, 1955.19
  21. 21. (iv) It is proposed that the testing activities directly related to production of any agricultural produces like soil testing, animal feed testing, testing of samples from plants or animals, for pests and disease causing microbes will be covered by the negative list.(v) It is proposed to introduce a new section that shall impose penalty on director, manager, secretary or other office of the company, who is in any manner knowingly concerned with specified contraventions.(vi) It is proposed to increase the amount of tax payment of which should be evaded to be liable for punishment for a period of three years. Further failure to pay service tax collected to the credit of central government within 6 months shall attract a jail terms of seven years.(vii) It is proposed to classify offences under the act as non-cognizable and bailable offences(viii) It is proposed to grant a retrospective exemption to Indian Railways on the service tax leviable on various taxable services provided by them prior to July 1, 2012.(xi) It is proposed that where the carper area of residential unit is upto 2000 sq. ft or the amount charged is less than USD 200,000 in case of construction of complex, intended for sale to a buyer taxable portion for service tax shall be 25%. in all other cases taxable portion for service tax will be 30%. This change will come into effect from the 1st day of March, 2013.(x) The exemptions limits provided by to the charitable organization to be eligible for payment of service tax was USD 50,000. From this year this exemption is withdrawn. The charitable organizations shall also be covered by threshold exemption.20
  22. 22. (xi) The service tax shall be levied on taxable service provided in restaurants with air-conditioning or central air heating in any part of the establishment at any time during the year.(x) It is proposed to withdraw the following exemptions: (a) Services provided by an educational institution by way of renting of immovable property; (b) Temporary transfer or permitting the use of enjoyment of a copyright relating to cinematographic films was fully exempt so far, now this exemption will be restricted to exhibition of cinematograph films in a cinema hall or cinema theatre. (c) Services by way of vehicle parking to general public; (d) Services provided to government, local authority, or a governmental authority, by way of repair or maintenance of aircraft.21
  23. 23. Aditya Tiwari, Of Counsel, N SouthB.Com., Delhi University, LLB, Delhi University; Admitted to Bar in 1999. He is a corporate commercial lawyer withspecial interest in M&A, partnered and unpartnered cross border investments, corporate commercial contracting and realestate.Commencing his career as a specialist litigation lawyer, he has transited over the years into performing a strategiccorporate role whereby he renders generic client centric guidance, guides the client’s investment initiatives domesticallyand across borders, establishes the contractual regime for its businesses, manages its compliance regime, maintains aconstant vigil over its wider commercial environment especially when strategic and pre-emptive measure are indicatedand generally represents a one stop outsourced legal support to a business.In the infrastructure space, he maintains a quality real estate practice.He can be contacted at aditya.tiwari@nsouthlaw.com. Advocates th C-62 B, 6 Floor, Super Mart-I, DLF City-IV, Gurgaon, Haryana-122 009 (India) Telefax: +91-124-4042521, 4042522 E-mail: mail@nsouthlaw.com Website: www.nsouthlaw.com22